Oil Demand Likely To Surprise To The Upside
Oil prices have recorded the biggest weekly decline in three months thanks in large part to challenging economic indicators and growing demand concerns. Last week, U.S. crude inventories posted an unexpected rise, with the American Petroleum Institute (API) reporting a build of 4.91 million barrels, a sharp contrast from the anticipated decrease of 1.1 million barrels. This build has come after reports that U.S. crude production surged to 13.15 million barrels per day in February, up from 12.58 million barrels in January, suggesting supply is outpacing demand. But it’s not just bearish crude oil metrics driving the oil price decline. The EIA has provided an initial estimate that U.S. gasoline demand declined 4.4% Y/Y in April, a negative sign for oil bulls that has triggered a rapid pivot by speculative funds towards the short side of the market. However, commodity analysts at Standard Chartered have argued that the demand pessimism is overblown. According to StanChart, there appears to be a systemic downwards bias in the weekly estimates of U.S. fuel demand, with actual gasoline demand exceeding estimates in 22 of the past 24 months, while distillate demand (mainly diesel) has been revised higher in all of the past 24 months. The analysts point out that last September, the EIA put gasoline demand at 8.014 million barrels per day (mb/d), a stark contrast from the 9.465 mb/d recorded for in September 2022. Across the whole month, the EIA data implied a y/y demand drop of 5.6%, eliciting talks of demand destruction with some experts contending that demand was at its weakest since 1999. However, it later turned out that actual gasoline demand only fell 0.4% Y/Y, far milder than the EIA estimate of a 5.6% decline. StanChart believes the EIA’s estimate for April gasoline demand is too low with actual demand likely to be surprise to the upside. May & June Critical To Oil Fundamentals Weekly data by the Energy Information Administration (EIA) reveals U.S. crude stockpiles shot up to 7.3 million barrels for the week to April 26, a sharp swing from a draw of 6.4 million barrels posted the previous week marking the highest inventory levels since last June. Adding to the bearish data are expectations that the Fed will keep its benchmark federal-funds rate unchanged at around 5.3% as inflation appears to have reversed course. However, Standard Chartered has predicted that global oil markets will record the biggest stock draws in the first half of 2024 in May and June, implying we have entered a key period for oil fundamentals that will determine whether the market will tighten further or disappoint. StanChart says to watch global oil demand closely, predicting demand will hit an all-time high of 103.1 mb/d in May and increase further to 103.8 mb/d in June. The analysts have also predicted a y/y demand growth of 1.62 mb/d in May and 1.74 mb/d in June. Meanwhile, OPEC+ is set to hold its next ministerial meeting on June 1 in Vienna. StanChart’s model shows that the organization has ample room to increase output by over 1 mb/d in Q3 without negatively impacting global inventories. However, analysts have pointed out that OPEC is unlikely to make any drastic moves when it meets in June because it won’t have full information on whether the expected H1 tightening was fully delivered. Given this backdrop, StanChart sees the global supply deficit exceeding 2 mb/d in August if production stays at current levels, noting the markets are yet to price in the potential deficit. In contrast to oil markets, natural gas markets have suddenly turned bullish thanks to EU mulling cutting off more Russian gas as well as a late cold snap in Europe forcing EU gas inventories to reverse course. TotalEnergies (NYSE:TTE) CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after the EU sanctions Russian gas from the Yamal LNG project. Henry Hub prices are up 4.7% in Friday’s intraday session and have gained 24.4% over the past week to trade at $2.14/MMBtu. However, it’s going to be interesting to see whether these gains will hold considering that experts still expect Europe’s spare storage capacity to become constrained in late summer, although the cold snap has pushed back the timing of the tightness by about three weeks.
LNG spot prices have fallen. What does it mean for India
Global LNG market has been well-supplied in 2024, which has resulted in lower prices of the fuel since the beginning of the year. India—which is dependent on gas imports for 50 percent of its needs—has been a beneficiary of this ample supply in the market and has ramped up its consumption so far. Increasing natural gas consumption has been a priority of the government given lower emissions of the fuel. India aims to increase the share of gas in its energy basket to 15 percent by 2030. What resulted in softer LNG prices in the global market? From the highs reported in 2023 and 2022 due to the Russia- Ukraine war, global LNG prices have significantly cooled down in the current year. The drop in prices comes amid weaker-than-expected gas demand in Europe due to milder winters and high inventories in the market especially from the US. Spot gas prices are trading around $10 per million metric British thermal unit (mmBtu) currently compared to highs of $23 per mmBtu in early 2023. Gas prices have, however, risen since mid-April due to the geopolitical crisis in the Middle-East. Spot prices had declined to around $8- $9 mmBtu in the first quarter of 2024. How did India respond to lower LNG prices? Price-sensitive India has witnessed a rise in consumption of natural gas in 2024 amid lower prices of LNG. Sectors including power, fertilisers and industries ramped up intake of the fuel as prices hit three-year low due to ample supply in the market. On account of low gas prices, the power ministry said in April that it is considering to impose a mandate on generating companies to mandatorily operate their gas-based power plants to meet the country’s increasing power demand this summer. Why has India shied away in using the cold fuel? According to official data, total natural gas consumption in March was around 3 percent higher at 5,594 MMSCM from last year. However, consumption of gas in India has remained limited due to higher prices and difficultly to compete with other fuels such as oil and coal. Despite the push given by the government, consumption of gas in the power sector remains low. Power sector contributes only around 13 percent of the total gas consumption in India while fertiliser, CGD and industrial sector contribute for the rest. Where does India’s domestic production stand? India’s domestic gas production has remained steady despite efforts by the government to boost production. In March, domestic gas production rose 6.2 percent compared with the corresponding month of the previous year. The cumulative gross production of natural gas for the financial year 2023-24 was higher by 5.8 percent from last year. Why is it important for India to scale up gas consumption? Natural gas is seen as a transition fuel as the world moves from coal to renewable energy sources, given that it generates less carbon than most other fossil fuels. Globally, natural gas-based power generation is commonly used as back-up for the intermittent wind and solar power. With India moving towards its target of net-zero emissions by 2070, the Indian government is pushing for an increase of natural gas use in the country. The target is to increase the share of natural gas in the total energy basket to 15 percent from the current six to seven percent. For the same, the government has increased focus on city gas distribution (CGD) companies to PNG connections and wide-spread CNG network. Meanwhile, the government is also working towards using LNG as a fuel in transportation.
Indian gas exchange expects trading in green certificates
Indian Gas Exchange, India’s only gas trading platform, expects trading in green gas certificates to start early next year as the mandatory usage of compressed biogas by city gas distribution companies gets triggered next April. The Union government has made it mandatory that the CGD companies must use 1% of their requirement as CBG from financial year 2026 and take it to 5% by fiscal 2029. “We have proposed to (the) government to create green gas certificates on the lines of renewable energy certificates used by companies to meet their mandatory renewable targets,” Rajesh Mediratta, chief executive officer of IGX, told NDTV Profit in an interview. Compressed biogas producers can sell it to the local buyers at nominal rate and take CBG certificates for the premium price that can be sold on the exchange to the buyers in need of the certificates, according to Mediratta. The CGD companies, in locations where there is no access to the CBG, can buy green gas certificates. It will also increase adoption of green gas produced by using agricultural and municipal waste. It will also have a larger shelf life and will save lots of expenses in transmission tariffs for buyers to transport gas over large distances. “We expect the government to come out with the guidelines detailing the green gas certificates this year that could be implemented from April 2025 when the mandatory CBG usage will get triggered,” Mediratta said.